Inflation is now increasing at a 9.1% annual rate.  The Fed is likely to increase short-term interest rates by at least .75% (perhaps as much as 1%) at its July meeting in order to reduce demand by slowing down the economy.  Increasing interest rates is a blunt tool.  It could easily set off a recession and put a lot of people out of work, creating additional misery at a time when wage increases are already lagging behind price increases.

In my last post, I discussed the basic causes of inflation, namely irresponsible deficit spending by Congress over many years as well as the huge amount of quantitative easing carried out by the Fed in recent years.  These actions have enormously increased the amount of money floating around in the economy by many trillions of dollars.  On top of this enormous buildup of federal debt in the system, it was the $5 trillion in Covid relief stimulus funding in 2020 and 2021 which tripped off the current flare-up of inflation.

Of course, the Fed must now take the strong measure of raising interest rates.  But the Fed cannot fix inflation by itself.  It needs help from Congress on fiscal policy.  Here are a few things that Congress can do:

• Stop digging, i.e. stop making the inflationary environment worse. This includes ending the remaining Covid relief – that is boosting price levels by 0.2 to 0.7 percentage points.  Avoid adding more to the deficit by such measures as a gas tax holiday, student debt cancelation, expanded veteran’s benefits, or new tax cuts.
• Lower health care costs. Thoughtful healthcare reform, especially for Medicare providers, Medicare Advantage plans, and coverage of prescription drugs can significantly reduce the inflation rate.
• Reform the tax code to raise more revenue. Tax increases can reduce demand in a distributionally desirable way, putting downward pressure on inflation.  Congress could also limit tax expenditures and subsidies which drive up specific prices in the economy.
• Limit discretionary spending, reduce consumption-oriented spending, and shrink aid to states. Congress should reimpose discretionary spending caps and reduce spending on various programs from farm subsidies to Social Security benefits for high earners and federal aid sent to cash-flush states and local governments.
• Promote work, savings, and investments. Congress could reduce barriers to work by eliminating the Social Security earnings test, allowing older workers to collect the Earned Income Tax Credit, and providing vocational training for disabled workers.
• Lower energy, trade, and procurement costs. The government could reduce tariffs, end regulations that boost shipping costs, and encourage more extraction of fossil fuels.

Conclusion.  As described above, there are lots of things that Congress and the President can do to help the Fed bring inflation under control.  Such help would lessen the pain by speeding up the whole process, thus increasing the chance of achieving a “soft landing” with a shorter and milder recession than would otherwise occur.

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Inflation has now become a very serious problem for the U.S.  The annual rate is averaging above 8% (8.5% in March, 8.3% in April, and 8.6% in May).  The Hoover Institution’s John Cochrane has given an excellent analysis of the underlying fiscal and monetary policies related to inflation.  Consider:

• The current inflation was sparked by fiscal policy – during 2020 and 2021 the government printed or borrowed $5 trillion and sent checks to people and businesses.
• The Federal Reserve’s monetary policy tools to cure inflation are blunt. By raising interest rates, the Fed pushes the economy toward recession.  It hopes to push just enough to offset the fiscal stimulus boost.  But monetary brakes and a floored fiscal gas pedal mistreat the economic engine.
• Higher interest rates will directly make deficits worse by adding to interest costs on the debt. Each percentage point interest rates are higher means $250 billion more in inflation-inducing deficit.
• Many governments, including the Biden administration, want to address inflation by borrowing or printing even more money to help people pay their bills. That will only make matters worse.
• Monetary policy alone can’t cure sustained inflation. The government will also have to fix the underlying fiscal problem.  Short-term deficit reduction, temporary measures, or accounting gimmicks won’t work.  Neither will a growth-killing high-tax “austerity.”
• A favorable outcome requires economic growth, which raises long-run taxable income. The U.S. also needs spending reform, especially on entitlements.  And it needs to break the cycle that each crisis will be met by a river of printed or borrowed money, bailouts for the big financial firms, and stimulus checks for voters.
• The good news is that inflation can end quickly, and without a bruising recession, when there is joint fiscal, monetary and economic reform. In the U.S. tight money in the early 1980s was quickly followed by tax, spending and regulatory reform.  Without these reforms, the monetary tightening might have failed.

Conclusion.  A very serious inflation problem is facing the United States.  It is clear (as described above) what needs to be done to address it.  Does the Biden Administration have the political will to get the job done?   Or will Biden flounder like Herbert Hoover did after the stock market crash of 1929 and allow inflation to remain a damaging economic issue all the way into the next presidential campaign?

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I have devoted many posts on my blog, ”It Does Not Add Up,” to the topic of racism in America, one of the most contentious topics in the public domain today. For example, “Is There Structural Racism Still Remaining in the U.S?” concludes that the major form of structural racism still existing is the academic achievement gap between blacks and whites, and suggests specific programs for addressing this disparity.

The newest hot topic in race relations is the concept of equity which means equal outcomes achieved, if necessary, by unequal treatment, biased competition, and preferential judging.  Equality, on the other hand, means equal treatment, unbiased competition, and impartially judged outcomes.

The problem with the concept of equity is that it challenges America’s bedrock principle that people should be treated equally and judged as individuals, not as members of groups.

Americans are very generous and support some form of social safety net for the poor and disadvantaged.  The debate has always been about how extensive the social safety net should be and how long it should last for each recipient.  But most Americans don’t want to turn welfare programs into large and permanent entitlement programs, giving substantially different treatment to different groups, even if those groups have suffered historical wrongs.

The black policy expert, Shelby Steele, says that blacks don’t have to fight so much for freedom anymore, but have to do something more difficult: fully accept that they are free, and stop acting like victims.

The black linguist, John McWhorter, explains that the current version of antiracism, in its focus on an oversimplified sense of what racism is and what one does about it, is content to harm black people in the name of what can only be called dogma. It exploits modern Americans’ fear of being thought racist to promulgate not just antiracism, but an obsessive, self-involved, totalitarian, and utterly unnecessary kind of cultural reprogramming.

The black scholar, Ian Rowe, promotes the four-point plan F.R.E.E. (freedom, religion, education, and entrepreneurship) for all children to overcome the victimhood narrative and discover their pathway to power.

Conclusion.  The problem with equity is that it has the radical goal of re-engineering society through coercion.   Equity is just a new brand name for a very old program of achieving equal outcomes.  Its name is socialism and we know from long experience that it doesn’t work.

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“Hey, hey, ho, ho, Western Civ has got to go”
Reverend Jesse Jackson, Stanford University, January 15, 1987

Americans, and other people growing up in the western world today, are among the luckiest people in human history.  We are lucky because men and women before us worked hard to make it so and performed feats extraordinary and mundane to see that luck was what we got.  A luck that much of the world still wants to take part in.

Douglas Murray, in his new book, “The War on the West,” describes very clearly why westerners are so lucky.

Consider:

• The west has given the world a disproportionate number, if not most, of the things that the world currently benefits from.
• They include almost every medical advancement that the world now enjoys. They include almost every scientific advancement that the world now benefits from.
• The west led the world in the invention and promotion of the written word. Westerners founded most of the world’s oldest and longest established educational institutions.
• Western peoples happen to have also developed all the world’s most successful means of commerce, including the free flow of capital.  The system of free-market capitalism has lifted more than one billion people out of extreme poverty just in the twenty-first century alone.
• It is the western people who developed the principle of representative government of the people, by the people and for the people. The western world has developed the principles and practice of political liberty, of freedom of thought and conscience, of freedom of speech and expression.  It evolved the principles of ‘civil rights,’ rights that do not exist in much of the rest of the world.
• Western achievements have led to a footfall that is entirely one-directional. There is today no serious movement of peoples in the world struggling to get into China or Russia, as they are, at great personal risk, trying to move to America.  The migrant ships across the Mediterranean go in only one direction – north.  In spite of everything that is said against it, America is still the world’s number one destination for migrants worldwide.
• The culture which is now so fashionable to deprecate remains the only culture in the world that not only tolerates but actively encourages a dialogue against itself.

Conclusion.  For all the above reasons and many more, Americans and other westerners have the highest quality of life that has ever been achieved in human history.  It is truly amazing that so many people in the West today apparently cannot see this.  Most of the rest of the world wants the same prosperity as well as the personal freedom and security that we enjoy in such great abundance.

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According to a recent PEW poll, Americans are in a pessimistic mood.  Of course, there are a lot of things to be worried about right now, but things are not really as bad as they seem.  Consider:

• The Pandemic. The pandemic is clearly subsiding.  94% of American adults now have Covid antibodies, either through vaccination or previous infection.  This means that we have achieved herd immunity.  The latest surge in new daily infections is also subsiding.  In other words, the pandemic is on track to becoming endemic (routine) and we will continue addressing it in the same way as we deal with the common seasonal flu on an annual basis.
• Inflation appears to be leveling off at an annual rate of about 8% (8.5% in March, 8.3% in April, and 8.6% in May). The Fed will have to keep raising interest rates until the inflation rate comes down.  This process could take a year or more and, in the meantime, there will be real pain for millions of people on fixed incomes.  The current inflation was tripped off by the government’s fiscal stimulus in response to the pandemic and there will be political repercussions starting in November.  But inflation is likely to be back down to its normal 2% level about a year from now.

  

• The Ukraine War. Ukraine wants to be free and independent and we are helping the Ukrainians defend themselves against Russian aggression.  The Ukrainians themselves will have to decide how to end the war: drive the Russians out or reach a lesser compromise.  But our willingness to defend democracy around the world is one important reason why America is so widely admired by other countries.
• Polarization.  The current intense level of polarization in our politics is a sign of our vigorous democratic system in action.  There are many contentious issues such as an increase in crime, abortion rights, gun rights, and K-12 educational policy which can only be resolved through the democratic process.  The inter-workings can get messy, but this is how democracy operates in practice.
• National Debt. This is the one issue that I am less optimistic about. Our national debt is now over $30 trillion and growing rapidly.  It will probably take a new financial crisis to force our national leaders to get federal spending sufficiently under control so that, at least, we stop adding to the debt and, therefore, shrink it as a percentage of GDP over time.  As the attached chart shows very clearly, it is entitlement spending that is the main culprit in our massive and growing debt accumulation.

Conclusion.  Many of our apparently severe political disagreements on such issues as abortion rights, gun rights and educational policy will be resolved through our normal, even if highly contentious, democratic processes.  The out-of-control national debt, unfortunately, may require a major new financial crisis to force our national leaders to take major corrective action.

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Any free country like the United States will always have serious problems to solve: mass shootings, political polarization, inflation, etc.  But our democratic system of government and versatile economy are very good at addressing new problems as they arise.  Many other countries around the world admire our achievements and would like to be as free and prosperous as we are.

Consider:

• The Pandemic. We have now virtually defeated the world-wide pandemic by adopting a decentralized approach with the states in charge of requiring lockdowns, mask mandates and school closures.  It is American pharmaceutical companies, which developed the world’s most effective vaccines in record time, that have allowed the U.S. to essentially achieve herd immunity. The latest U.S. variant is already decreasing in the number of new daily infections.  Compare this with the Chinese zero-Covid approach which is floundering and badly hurting their economy.
• Democracy is flourishing around the world (see chart).  Democracy is fragile and hard to establish but it is also contagious because people everywhere have a yearning for the personal and political freedom which democracy provides.  More democracy means more peace in the world because democracies seldom go to war with each other.
• The Ukraine War. Ukraine wants to be free and independent from Russia and the U.S. and its allies are rightly helping Ukraine defend itself.  Russia is a huge troublemaker all around the world and hopefully will be severely punished for starting this war.
• Economic and social progress in the U.  The U.S. not only has the highest median individual and household incomes in the world among major economies, but also African/Americans are making much economic and social progress as well.  American social and economic progress is highly visible to the whole world and this, of course, adds greatly to our stature among other nations.

Conclusion.  America is leading the world by example.  We’ve got the pandemic under control with American-made vaccines and a decentralized political system.  We’re demonstrating our commitment to democracy by defending Ukraine against the Russian invasion.  We are constantly demonstrating the superiority of our own political and economic system by steadily improving the lives of the vast majority of our citizens.  We’re doing the big things right and tackling new problems as they arise.  We should be optimistic about the future of our country and its crucial role in world affairs.

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Politics in the United States is highly polarized.  We easily recognize this at the national level because the parties in Congress are constantly squabbling with each other.  But it is also true in state government as well.  In fact, of our 50 states, only two, Minnesota and Virginia, have split legislative chambers.  All of the other 48 states have both legislative houses either Republican (30 including Nebraska which is unicameral) or Democratic (18).   Also, notice how both individual Democrats and Republicans are becoming more ideological in their views. This, of course, increases the degree of polarization at all levels.

Politics is polarized because there is such a sharp division of opinion in the country on so many basic issues.  The answer is not to try to force unification, which won’t work anyway, but rather to let the states resolve more issues on their own. Consider:

• The Electoral College. This brilliant invention by our founding fathers aims to elect presidents who represent the nation’s great diversity by obliging them to earn votes across many states and regions.  It can bestow a broad-based national mandate on a president who won only a plurality of the popular vote such as Lincoln in 1860, Nixon in 1968, and Clinton in 1992.  Election by popular national vote would encourage candidates to campaign only in large, voter-rich metropolitan areas and media markets.  A multiparty democracy would result, in which runoff elections would be necessary for the ultimate winner to achieve a majority vote.
• The pandemic. The attached chart shows which ten states did the best job overall handling Covid, based on the three variables of the economy, education, and mortality, and which ten did the worst.  The best performers were largely small red states (Florida is a large red state) and the worst performers were mostly large blue states.  The leaders largely avoided lockdowns, mask mandates, and kept their schools open.  A national Covid policy, run by the bureaucracy-controlled CDC, would have been a disaster.  Note also the huge red and blue difference in attitudes about the seriousness of Covid.         
• The likely overturn of Roe vs Wade. The 1973 Roe vs Wade decision by the Supreme Court was clearly unconstitutional.  The likely repeal will return abortion policy to the states (closer to the people) where it will be resolved on a state-by-state basis.
• Gun Control. Notice the widening gap between Republicans and Democrats on the attitude towards gun possession.  Red states and blue states will decide gun control issues differently as their legislatures see fit.  This is how it should be done.

Conclusion There is huge polarization in our body politic at both the state and national levels.  This polarization exists because there is such a wide divergence of views on so many fundamental issues.  Our constitution has set up a strong central government to perform basic national functions such as providing for national defense, conducting foreign relations, and maintaining a common currency.  But we should adhere more closely to the Tenth Amendment which says that all powers not specifically assigned to the federal government are reserved for the states.  This would go a long way to decentralizing the way public issues are resolved and defusing much of the hostility now directed at the federal government.  Making government closer to the people in this way would go a long way towards depolarizing our nation.

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I have been writing this blog for almost 10 years, beginning shortly after the 2012 national elections.  I have named the blog “It Does Not Add Up” because my main focus is the fiscal health of the United States.  Our national debt, now in the neighborhood of $30 trillion, is far too large and is growing in an unsustainable manner.

It will be very difficult to fix the debt problem.  In theory, we can do it by controlling the cost of entitlement spending.  But this will be very hard to accomplish in practice.  I now have adopted the more pessimistic view that it will take some sort of a “crisis” for our national leadership to effectively address this problem.  The current 8% annual rate of inflation could become such a crisis but more likely will be brought back down to a tolerable level by aggressive Fed action in raising short-term interest rates.

Nevertheless, I am still optimistic about the long-range future of the “American Project”  because we have a fundamentally sound free enterprise economic system as well as a stable system of democratic government respecting individual rights.

My optimism about America is backed up by my personal satisfaction of living in the mid-sized city of Omaha, located in the deep-red state of Nebraska.  Consider these fundamental advantages:

• Low cost of living. The cost of living in Omaha is 8% less than the national average.

  

• Low crime rate. Homicides in Omaha are way below the national rate.

  

• Low rate of homelessness. The entire state of Nebraska has “only” 2400 chronically homeless people, much less than most other states.

  

• Income inequality. Income inequality in Nebraska is much lower than the national average, as is typical of red states in general.
• Educational equity. The eleven school districts in metro Omaha comprise a Learning Community whose focus is on early childhood education to better prepare children from low-income families to succeed in school.

  

• Unemployment rate. Nebraska’s current unemployment rate is 1.9%, the lowest in the U.S., and for Omaha, the unemployment rate is only 2.4%.

Conclusion.  While I no longer think that there is a simple or even relatively painless solution to fix our national debt problem, I am still optimistic about the long-term prospects for maintaining essential U.S. leadership in world affairs.  Perhaps my “rosy scenario” outlook is influenced by my own quality of life which is greatly enhanced by the favorable demographics of my city and state of residence.

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In my last post, I gave several reasons why I think Americans are too pessimistic.  Others are saying similar things.

But the fact remains that Americans really are pessimistic at the present time and this will have implications for the November 2022 national elections.  Consider:

• Foreign Policy is a plus for President Biden and the Democrats. Even though the Afghanistan withdrawal was handled poorly, Biden is now handling the Ukrainian situation very well.  Ukraine wants to be free and independent from Russia and we should do all we can to help them achieve this without getting directly involved in the war.  Furthermore, China’s current economic slowdown and failing Zero-Covid policy reflect poorly on its autocratic political system.
• Inflation. This is, of course, the Democrat’s biggest problem by far.  Americans are reminded daily of the rapidly rising price of gasoline.  Even if the annual rate of inflation continues to taper off slowly (it dropped from an annual rate of 8.5% in March to 8.3% in April), it is likely to still be high in November.  In the meantime, the Fed will be raising interest rates aggressively to combat inflation and this will slow down the economy.  This will likely make the current low unemployment rate of 3.6% go up, even though there is now a huge number of open jobs (11 million) in the economy.  And even large current wage increases are not keeping up with inflation.

  

• The likely repeal of Roe vs Wade. This will be a net wash politically.  Since state legislatures will now be in charge of setting abortion policy, both pro-lifers and pro-choicers will be working hard to boost voter turnout amongst their supporters.  Of course, more voting is very good for democracy in general.
• The culture wars give a big advantage to the Republicans. Gender ideology (trans-gender encouragement) and critical race theory (white supremacy and systemic racism) are toxic to parents of young children.  Unnecessary school closings and mask mandates at the behest of teacher unions have also created animosity towards the education establishment.

  

Conclusion.  Joe Biden is doing well on foreign policy, but poorly on domestic issues, and his overall popularity is sinking.  In other words, domestic policy failures outweigh foreign policy successes for presidential popularity.  This bodes poorly for the Democrats in the November 2022 elections.

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Maybe it’s just a combination of human nature and the way that the media emphasize negative news.  War, pandemic, inflation, this is what we hear about in the news and too many people are natural worriers.  Things sound pretty bad right now.  But I agree with Warren Buffett, the Oracle of Omaha, who says, “Never bet against America”.

Consider:

• The Pandemic. According to the CDC, 94% of Americans ages 16 and up have Covid antibodies either through vaccination or prior infection.  Now, after the Omicron surge, half of us actually have infection-induced antibodies and these prior infections are helping to blunt the effect of new variants.  In other words, get vaccinated and exercise reasonable precautions.  If you do catch Covid, it is likely to be mild or even asymptomatic.

  

• The Ukraine war.  Russia invaded Ukraine in February and brave Ukrainians are willing to fight and die to preserve their freedom and independence. The U.S. and its NATO allies are providing Ukraine with the military supplies it needs to drive the Russians out.  It is not only the right thing to do but also in our own best interest to defend democracy around the world as much as we reasonably can.
• The end of Roe vs Wade? If Roe vs Wade is struck down by the Supreme Court, as now appears likely, then the issue of abortion restrictions returns to the states.  Especially in the red states which tend to be pro-life, this will inevitably boost voter turnout in future elections.   This is good for democracy!

  

• Political polarization, dissension, and acrimony. Of course, we should try to disagree without being disagreeable, but democracy is inherently messy.  How much better it is to work out our differences under the rule of law than to risk violent insurrections.  This is one of the great virtues of our decentralized constitutional republic.
• Inflation is now running at an annual rate of 8.5% (as of March 2022). The Fed has already raised short-term interest rates by .75 % (to a total of 1%) but will have to do much more.  According to Richard Clarida, former Fed vice-chairman, if inflation is still as high as 3% a year from now, the Fed will need to raise interest rates to 4% in order to bring inflation down to the Fed’s goal of 2%.  Of course, to reach 3% a year from now, the inflation rate needs to level off real soon and then start dropping.  Let’s be optimistic and expect something like this will happen.  In the meantime, there will be the short-term pain of rising prices, but our underlying strong economy, and low unemployment rate, should carry us through the inevitable downturn.

Conclusion.  There are always serious issues to confront in a democracy, but the U.S. is in good shape overall.  The Pandemic is under control.  Ukraine is effectively resisting Russian invasion with our support.  The likely repeal of Roe vs Wade will result in a big increase in voter turnout.  The Fed should be able to get inflation under control with some temporary pain for the next year or two.  All-in-all, democracy is thriving at home and abroad!

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